Friday, March 1, 2019

This Week's Message: The Fed 'Ultimately' Back In Play Would Be A Good Thing!!

The Caixin Manufacturing PMI for China came in just a shade below 50 last evening, which was a marked improvement over the previous month. Asian equities moved from red to green on the news, rallying hard into the close on that and on positive trade news.

Despite push-back from trade hawks, rumor has it that a 150-page document is being prepared for Trump and Xi to review and potentially sign as early as this month. That news has global markets rallying this morning.

Here's from Barron's:
"Bloomberg reports that the U.S. and China are preparing a final trade deal, one that stretches out to 150 pages. U.S. President Donald Trump and Chinese President Xi Jinping are said to be discussing a meeting in the middle of March to complete the deal."
The article also features a BMO Capital Markets strategist warning that a trade agreement "could have the downside of bringing the Federal Reserve back in to play":
"A deal, however, could have the downside of bringing the Federal Reserve back in to play, says BMO Capital Markets strategist Ian Lyngen. “We’re certainly not calling for any indication of a hike until December, though encouraging news with regard to trade negotiations between the U.S. and China—where a deal is said to be possibly signed as early as the middle of this month—reduces a major downside risk for the U.S. and global economy, as well as a reason for the Fed to stay on hold in perpetuity,” he writes. “We’d also offer that slowing growth data only increases the urgency for the White House in order to re-energize animal spirits and boost equities/sentiment.”"
While I absolutely agree that a deal "reduces a major downside risk for the U.S. and global economy", I reject the notion that, in the grander scheme of things, seeing the Fed "back in play" would be a negative (operative words being "in the grander scheme of things").

You see, should a recession occur before the Fed gets back to tightening mode -- which is my expectation if U.S./China trade relations are not fixed soon, and/or if Washington goes hard after Europe on similar grounds for more than a few months -- we've, frankly, got hell to pay! I.e., while the Fed will get as unconventional as ever in combating such a premature downturn, there just doesn't exist anywhere near the monetary firepower that existed going into previous recessions.

So, yes, attendant market volatility notwithstanding, it would be a good thing if the Fed were back in play as a result of smart trade policy going forward. Trust me, that's a far far better scenario than the alternative!!

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